Open Covenants, Privately Arrived At

CEPR Discussion Paper No. 2709

Number of pages: 60Posted: 26 Mar 2001

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Date Written: February 2001

Abstract

This Paper analyses strategic bargaining between two agents each of whom negotiates on behalf of a principal. The principals face uncertainty about the bargaining skills of their agents as measured by the agents' abilities to assess the opponent's preferences. Agents then have an incentive to promote their reputation as skilled bargainers through their bargaining behaviour. We compare two different scenarios: open-door bargaining, where the principals observe the entire bargaining process, and closed-door bargaining, where they observe only the final outcome. We show that with open doors, the higher visibility of agents' actions induces low-skill agents to negotiate more aggressively than behind closed doors in order to distort their principals' inferences. Since this "posturing" increases the probability of delay or disagreement, closed-door bargaining is more efficient.